TFSAs – a round table on future trends and dvelopments with Classic Business

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20 March 2017 | Nonhlanhla Kunene.

In case you missed it, Intellidex general manager Colin Anthony took part in a round table discussion on tax-free savings accounts with Classic Business’ Michael Avery on 13 March. Also on the panel, to share some insight into the latest trends and developments, were National Treasury’s director of savings and personal income tax, Christoper Axelson and Neil Sinclair, business development manager at Glacier by Sanlam.

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TFSAs – future trends and developments

Micheal Avery: Well from diversity and transformation we’re going to be talking about diversity of a different kind, and perhaps diversifying your investments into tax-free savings account. Now from the first of March we’re entering our second year, our second cycle of a period when investors can begin that all important decision making process about where to stash their hard earned savings in the 2017 tax-free cycle, and will you be keeping your cash account? Are you going to be leaving it to the pros this time with unit trust investments, or finally indulge your appetite for risk and go with an aggressive investment on the stock exchange? If you can, that is.

Those are some of the questions we’re going to be getting to tonight. And there are some common myths that we’ll try and expose about these accounts. In tonight’s panel we’ve got Treasury on the panel as well, and recently we had Treasury publish some regulations, some amendments to spell out the process for things like transferring, to clarify the policy of transfer and performance fees, and also some guidance on the adequate and consistent disclosure of returns to fixed deposit rates.

So it’s a great pleasure to welcome, without any further ado, Colin Anthony, GM of Intellidex. Colin this panel really arose on the back of you sending me some interesting talking points and things worth considering, and I think Intellidex needs to be lauded for being one of the drivers of information in this market since its inception, so well done and welcome.

Anthony: Thanks Mike, thanks for having me.

Avery: Also on the panel is Chris Axelson, director of savings and personal income tax at National Treasury. And Chris I won’t call you Momo again, great to have you in studio.

Axelson: Good to be here, thanks.

Avery: And next to you is Neil Sinclair, business development manager of Glacier by Sanlam. Neil thanks for joining us and for being a bit of an industry representative tonight.

Sinclair: Thank you Michael.

Avery: Now Chris kick us off. The annual and lifetime limits, I’m gonna dive into an interesting one here, which caught a few people off guard. Why not raise the lifetime limit but only the annual one?

Axelson: It’s a bit of a maths issue I suppose, I mean if we’ve got this lifetime limit of R500,000 and was gonna take you probably around 16 years, if we didn’t change anything, just to get there. So if we start increasing that as well now, then no one will ever get there. So, you know, we’d rather keep that the same, increase the annual limit and then when it starts getting closer to a point where it’s actually gonna bite for individuals, perhaps then we can relook at it. But it didn’t make any sense to increase it now because otherwise it will just extend the time period upon which someone would take to get there, and they might never get there. So that’s the approach we’re taking.

Avery: So you’re saying basically, it is open for review, but it’s not gonna be one of those annual review type things, it’ll be, you know, when we get closer to that lifetime limit.

Axelson: Ja it’s an interesting one, I mean, from our perspective we’re also looking at the revenue loss from these types of incentives and all the incentives we have in the system, we look at the revenue loss. Um, we spoke to some other governments and they said, you know, you start off with these type of accounts and the initial revenue loss is really quite small because the amounts going in are quite small, and then after a few years it just grows and grows and grows and suddenly they’ve got all these huge amounts within these accounts which are completely tax-free. I mean, we’re mindful of that as well. We’ve got to be fiscally prudent given the circumstances at the moment. So we think it’s important to have that limit there.

Avery: Revenue lost is savings gained on the other side. And that’s really what we need to see grow in the South African economy, is that deepening savings pool. Certainly, business seems to be a very good net saver with all the billions sitting on corporate balance sheets. Government’s fairly extended and personal households are fairly extended. Colin what do you make of the first year of tax-free savings so far, when we look at the number of accounts opened, what are we sitting at?

Anthony: Ja I think it’s pretty promising, what I’d like to say is that, hopefully we get to a situation that Chris is talking about, because that means they’ve really established and gained traction in the market, but when it becomes a worry for SARS, that they’re starting to lose income, then obviously the program would be a great success. But we’ve just started our second survey…uhm it’s our third survey, but our second really comprehensive survey of the markets, last month. And we’ll have all the latest information on the number of accounts and that, probably in about a month, month and a half.

Avery: Roughly, does anybody around the table know what sort of penetration we’ve seen so far? I mean obviously, the philosophy is we want to get more people saving, and I suppose the real acid test is whether or not we’re seeing penetration?

Anthony: I think it’s also a question of which market we’re seeing in penetration. I think in terms of the number of accounts opened, I don’t remember the exact figure but it was quite high for the first year of operation. Obviously people with income, middle to higher income, it’s easier for them to put money into TFSAs. The question we haven’t really been able to get to grips with in our surveys is how many of these are the target market that Treasury has in terms of people who weren’t saving before? So we did have a figure for first time … are you a first-time saver? But we had to ask the service providers that. So they’re never 100% sure, they say, “Ja, well they’re the first time with us.” But that’s an area we’re going to be looking at quite carefully because obviously it’s crucial in terms of targets with Treasury.

Avery: So it is a difficult thing to measure because someone may have savings elsewhere that they don’t disclose. From Treasury’s perspective, Chris do you have a number of people brought into the savings net as a result of this?

Axelson: Well we haven’t. We’ve been working with SARS to try and find out exactly that, and we haven’t published any figures yet, so I can’t put those forward, but we’re gonna be very careful about it. And we are quite lucky, I suppose, from SARS being a central repository of information really, so they can see if you’ve got different accounts and where they are. So then we really should be able to get a nice, firm grasp on how many new, additional savers there were through these accounts, but it’ll probably be a year or so before we can get that information out and make it public.

Avery: I certainly struggle to find it, but I mean it’s obviously because it’s very difficult to correlate, one wants to be 100% accurate, make sure you’re not double counting and that kind of thing as well.

From an industry perspective Neil, what has the response been like? I know initially the industry was fairly luke warm on these, because they looked at them … ahhh R30,000 you know, annual limit. Is that the sort of rats and mice kind of investors that we want to attract? We’re after the high net worth individuals. Maybe I’m being slightly unfair here, but what has the response been like?

Sinclair: Well I think … I think the banks have done really well in creating some awareness around these kinds of accounts and we can actually see from some of the research that we’ve done, is that the banks have probably captured most of this market. Which for me personally is slightly disappointing because if you use your interest exemption well enough, you can save enough money in cash. Use that exemption. Why not use your tax-free savings account for an investment that can give you a better long-term return?

So, I think, asset management businesses, investment houses, we can learn a lot from maybe what the banks have done to try and bring a little bit more awareness as to the type of results you can get for using your tax-free savings account.

One of the worst and interesting things we found was they seem to be using these tax-free savings accounts as an emergency fund, which I find almost perverse in the sense that the benefit that you’re going to get from the tax-free savings account only happens over time because of the power of compounding. And to be utilising the tax-free savings account for an emergency fund is absolutely crazy.

Avery: Well it does demonstrate that there needs to be far more education in the marketplace Colin, and perhaps we’ve learned an overall message that it’s good to be saving, and here’s a nice little wrapper for it, but we need to ensure that we’re saving for the right purpose with these vehicles. I mean if you’re under 35 and you’ve got that time horizon, this is really ideal for you.

Anthony: Certainly, Uhm, I don’t know how to overcome that problem because there is quite a bit of publicity around these accounts. The newspapers have covered it reasonably well. In terms of that issue, it’s a problem across the investment spectrum, not just in tax-free savings I think, I’m sure you’ll agree with me, is the long term, long term, long term, is so important to your overall portfolio returns. And I think tax-free is as much a victim of that as other investment products.

Avery: And when we look at this Chris, from a risk perspective, one of the issues is, Treasury’s approach is to limit options to a certain degree. Obviously fees are a big issue, and you don’t want individuals savers to be investing in products that are gonna erode their investments and savings over time with fees. But one can’t invest in any single stock or share, as per the regulations, and I just wanted to understand Treasury’s thinking there, because for me, and I often field emails from listeners saying, you know, they’d really love to, and they’re well aware of the risks of investing in the stock market and, you know, would find this a very attractive incentive. So just explain Treasury’s thinking.

Axelson: So we really wanted to be prudent in this area, I mean again, we’ve looked at all the other international examples, and some of the areas where other countries have run into problems is where they’ve had direct share investments. Either people have put a lot of money in, and then they’ve lost the money, but then they went to the government and said no but this was a government sponsored fund, you should be able to reimburse us for these big losses.

There’s also been cases in the US, where some very savvy, smart, wealthy individuals have invested in things like penny stocks, and they’ve gotten huge returns and then they reinvest and they multiply it many, many times. And suddenly they got these massive amounts within these funds that are now all tax-free again. So yes you could perhaps look at some, perhaps only listed companies, or some others.

But we really wanted to start this off in a conservative manner and get people the idea that diversification is important. If you put all your stocks in one stock, if it was African Bank you know, those individuals would have had a huge hit, and now, you know, you’re trying to get people to enjoy saving, get used to saving and get started. We thought it was just a little bit too risky to go tha far.

Avery: Neil what do you make of that approach?

Sinclair: I would agree. I think there are other ways to get access the equity markets and to diversify your risk. A simple solution would be to buy a Satrix Top 40 tracker for you, for example, or any equity fund that is offered by a lot of the top management businesses. So to buy one particular stock in an investment like that, I think is risky. I would rather diversify my portfolio and have something managed.

Avery: And perhaps not what its intended purpose is for. I mean if you look at the overarching philosophy Chris, what Treasury is trying to do here, and that’s have a pool of savings that’s not really risk capital, but it’s long-term and it’s fairly moderate in terms of that risk profile. Colin what do you make of that?

Anthony: Well the advantage of that approach that Treasury’s taken is also in terms of, once again, the target market. It’s low income earners, people who haven’t invested in the stock market before and people who don’t necessarily know how shares work that well. So in that sense, it’s probably a good policy. Obviously, any restriction can be a little bit chafing to clients who want to go for it on their own. But obviously those guys can invest portfolios without the tax-free benefits.

Avery: Hmm, ja it speaks to a different market Chris, I mean your target market with this particular incentive, did Treasury have a key market in mind?

Axelson: It’s definitely lower to middle income earners, I mean, the thing is, you know, as Neil said, the interest exemption is high so a lot of individuals can get that. The capital gains tax exemption is also there. But you know there’s no dividends tax exemption, so even if you’re a very low income individual going into shares for the first time, this will now be dividends free, especially given the recent rates increase. So we do think it has it has advantages.

I mean the main thing that we’re really focussing on here is, you know, you look at a lot of literature and it’s not about the actual rate of return that influences people, it’s the behavioural side. It’s the industry, the product providers, you know, getting some excitement about this product. Getting billboards out, everybody talking about it. The fact, even just saying tax-free really helps and tries to get people excited. You know we wanted to get people excited about saving.

We got that annual limit so they put a deadline on their saving decisions, so they can’t say, ahhh I’ll save tomorrow. They have to save this year. You know, it’s a limit. And also we don’t allow people to take money out and put it back in because we want them to have a second thought before they take that money out. They get an impulse to go and buy something, they must say, “Ooh, hang on, nut if I take it out, I can’t put it back in this tier.” So they think twice about it. Those are the type of policy design mechanisms that we’re using to try and get people to think a little bit better about savings and get them excited about saving.

Avery: A lot of positive nudges there if you’re looking at behavioural economics theory around policy design and let’s hope it does have that effect. I think, from my perspective, it’s had that effect from just looking at the way the service providers, Neil, have approached this. It has actually created an awful lot of excitement. And I was probably a little bit disparaging earlier when I said, well it’s rats and mice, it’s not really where we’re playing in. It looks like there’s going to be a lot of cross selling happening here as well, and it’s a way to broaden the client base.

Sinclair: I think initially product providers just wanted to see what they could do and how could they access certain markets. But, once they saw the benefits of it, sure there are some providers that say this might be a loss leader of a product, but it’s going to give me first-time access to a client. If that client has a really good experience with that product provider they’re going to think well, they do my tax-free savings account, maybe they should do my retirement annuity at the same time. So I think product providers need to start thinking like that. We need to start contributing to the debate, and at the same time, give client satisfaction within that, and those clients will come back to you in other ways, I think is also key.

Avery: Yeah that is the value in something like this Colin.

Anthony: If I could just say something about the cost of this. The industry’s been brilliant in terms of keeping the costs down. I mean obviously it is a very low margin product for them, a loss leader for some. So I thought there’s be some concern about that. You know, would there be enthusiasm by the industry? But, in terms of costs. Almost across the board, most companies have made the costs for TFSAs very, very low, and of course that just adds to the advantage of saving over the long-term and not using it as a savings account. Is because, you’re not only saving on tax, you’re saving on tax, but you’re saving on low costs on an account that you would be paying higher for outside of that TFSA account. So over time, you really, really benefit a lot more from that double…

Avery: That double whammy there of lower costs and no tax.

Sinclair: What was surprising for me, and pleasantly so, was that some asset managers who offered their funds with a performance fee actually decided, hang on a second, we will come to the party, and we will offer the same fund, and we will charge no performance fees on that, to give clients access to those particular funds.

Avery: And there was an amendment or an update to the performance fees Chris, what was that about?

Axelson: Ja, it was a bit technical, we were just saying that you can’t have performance fees at all, so even in your sub funds. But I think it’s quite interesting this whole thing because we didn’t regulate the costs. The only thing we regulated on costs was fixed deposits. But in all the other funds we didn’t which costs should go, because also we’ve seen in other countries, you set a cost cap, and then everybody bunches around the cap. So it’s good to see there’s competition.

We unfortunately had to delay transfers by another year, and we really need to get that in, ‘cause we think that once you’ve got transfers in, the completion between providers will be even better, because suddenly individuals really can just move. At the moment they might be stuck in some sort of accounts and they want to be in a different one. Luckily they can contribute with a new annual limit to a different service provider. But once we get those transfers in, hopefully those costs can come down even further through competition.

Avery: Well absolutely, but it’s amazing how the market does self-regulate if one uses a bit more of a light touch approach to regulation.

Axelson: Ja, wouldn’t comment on that [laughs].

Avery: [Laughing] Certainly! Now when we look at this, and overall Colin, it does seem to be, so far, a very effective tool, not only just as a tax-free savings vehicle, but to generate interest in education in a market place that so desperately needs to start educating a certain strata of savers.

Tim Modise who was hosting his show on Soweto TV, had me on last year to talk about tax-free savings and there are six million consumers out there who want to know more, who have this hunger and this appetite. From your perspective, where could we improve in some of the marketing and messaging?

Anthony: School level.

Avery: School level?

Anthony: Yes, I think it’s a crying shame in this country that there’s just so little investment education at school. Uhmm … Teach kids about the stock market, how it works. Teach kids what a TFSA is, teach kids about what an RA is, about endowments, about unit trusts, everything. Why do matriculants come out there and they not know the stock market in South Africa?

Avery: Not just the stock market, but basic finance. How many young savers get into credit card debt because they were never exposed to it in some formative way? I mean it should really happen at home, but at school as well, Neil?

Sinclair: Ja, I concur. I mean, basic budgeting becomes a problem, and if you can’t balance the books in your own life, you’re going to struggle going forward. So even basic budgeting on not overspending, on what the debt trap can really do to a consumer. Because if you get into that debt trap, that debt trap, down the line, actually prevents you from actually prevents you from making any savings because you’re constantly hounded and having to pay back debt and actually not start that saving cycle.

Avery: From a regulatory perspective Chris, you’ve also set out some clarities, some guidance around the responsibility of service providers to insist in managing those prudential limits that are set out every year. Can you just explain that, I found it a little bit vague. Maybe it’s just me.

Axelson: Yes, I mean so, you know, I would like to give everybody a reason for why it was delayed for another year. The point here is that we would like product providers to have a lot more responsibility in terms of managing people’s limits. And this is really in an environment where transfers are allowed. So we don’t want transfers to be able to be done by the individual, because it could lead to mistakes, it could perhaps lead to fraud, who knows, but if it’s done by the providers, you tell a provider, I want a transfer from you to product provider B. Now the product providers themselves need to be able to manage your limit. So if you’ve contributed R15,000 in the year already, and then you transfer to another product provider, that next product provider needs to know how much you’ve already contributed to the previous product provider so that they can manage your limit, if that makes sense?

Avery: Yes it does work almost like porting your number from one service provider to another. They need to handle that process, and also manage that the number doesn’t change in between. A very simplified explanation there, but does that not run the risk of adding cost? If I’m a service provider, do I not look at this as extra admin and now am I gonna bump my fees up?

Axelson: Well, so the one thing, especially was, just in terms of the time it would take to get the systems ready, which is why we would like to provide a postponement of the transfer, just so that all the service providers can talk to each other, ‘cause now we’re gonna have banks talking to asset managers, talking to life insurers, which we’ve never done before in this industry. So, you know, they’re gonna have to have a very fluid arrangement when these transfers take place. So it might add costs. We hope it doesn’t. That’s why we’d like to give providers a lot of time, to make sure that their systems work and are clear, and hopefully they can get that ready before transfers become effective.

Avery: Neil, what’s your perspective on it?

Sinclair: I think the biggest impact really is around the IT challenges that come with something like this. The development, the time, the programing that needs to go into it. I mean, as it is, our business spends a significant amount of time, every time there’s a change in something, making sure that the back-end systems work from an IT perspective.

Avery: Of retirement reform, I mean we don’t have to raise what happened when TEDA was delayed and all the IT costs that were incurred there. But overall though, if Treasury is saying that we’re just giving the industry time to ensure that you all start talking – getting your systems talking to each other – do you see it adding a significant layer of costs?

Sinclair: I don’t thinks so. I think traditionally in the business that we operate in at the moment, costs are being driven down at the moment by all sorts of forces, so a decision like that is not going to push up the cost, well certainly in the space that we are operating in, it’s not gonna push up our admin fees. Other service providers? I can’t speak for them.

Avery: Colin, do you have a fear here that this sort of additional administrative burden might add a layer of costs?

Anthony: Well I really wouldn’t know. If it does it would be a shame because the low cost element of this has really been a great benefit.

Avery: Uhmm, it’s difficult to say, but I mean, intuitively, one might look at this and think any additional compliant or administrative burden is inherently initially gonna add a bit of cost. But once those systems are up and running then surely it should net off over time. Just some concluding thoughts as to the market and Treasury’s philosophical approach. What do you make of it?

Anthony: Well no, we support it, we really support the way they’ve gone about it, the safeguards they’ve put in, particularly keeping in mind that the target market is the first time saver, the person who hasn’t been saving before. This is to benefit the country as a whole because debt is a serious, serious problem in this country. I think come 14 years now, when people start hitting their lifetime limits, it’ll actually be 12 years from now, hopefully as Chris said earlier, it’s starting to cost them a lot of money and it’s gained a lot of traction.

Avery: Yeah well let’s hope it is a big revenue loss leader for Treasury because, as I said earlier, then it means we’re all saving more, and we’re actually well on our way to achieving growth because that’s what we need in the South African economy.

And that’s all the time we have for tonight, I’m afraid. Thanks to all my guests, Chris Axelson, director of savings and personal income tax at National Treasury, I appreciate you taking time out of your busy schedule to come on down and share with us Treasury’s thinking around the tax-free savings accounts. Colin Anthony, GM of Intellidex, thanks for generating some fantastic insights and research into the industry, and Neil Sinclair for agreeing to be our industry, uhmm, I wouldn’t say guinea pig, but our industry expert tonight, business development manager at Glacier by Sanlam.

From me Michael, producer Anita Williams and sound engineer, Mdu Cele, get on that savings bus if you haven’t already. Goodnight.